In December 2017, Finra announced plans for a major overhaul of the expungement process in its Notice to Members 17-42. The proposal included a number of changes, most of which were designed to make it more difficult and expensive for financial professionals to seek expungement. Most significantly, the changes included a one-year time limit for any expungement request, a heightened standard for granting expungement, increased fees, and the requirement of a unanimous decision by three arbitrators.
Recently, Finra finally offered some insight into what will happen next.
The original proposal also contemplated the creation of a roster of specially trained “expungement-qualified” arbitrators.
While many voiced opposition to the proposal, it was met with generally positive feedback from the SEC (which has final approval over any rules proposed by Finra) as well as investor-advocacy groups like PIABA.
Since announcing the proposal in December 2017, Finra has been virtually silent on the subject. Its only public comment came in January 2019 when a Finra report noted simply that the expungement overhaul was “in progress” and that it was “considering next steps.”
Earlier this year, presidential hopeful Elizabeth Warren took notice of Finra’s silence and prodded it to take action. Warren sent a letter to Finra CEO Robert Cook in March 2019 asking a host of questions related to Finra’s expungement process, including the direct question of when Finra would submit the new expungement rules to the SEC for approval. While Warren requested answers no later than April 4, 2019, Finra never provided a public response.
On October 3, 2019, Finra’s Board of Governors issued a news release announcing that it had approved one piece of Finra’s original expungement proposal – the creation of a roster of specially trained “expungement-qualified” arbitrators. The only specifics offered in the release is a statement that the Board approved a rule amendment to “create, among other things, a roster of arbitrators with enhanced training and experience from which a panel would be selected in certain instances to decide an associated person’s request to expunge customer dispute information.” The Board also noted that the proposed amendment “will next be filed with the SEC.”
After filing with the SEC, the rule will be reviewed by SEC staff and published in the Federal Register for comment. SEC staff then typically requests that Finra respond to comments, and it may propose amendments. Once the rule is finalized and approved, it will be published in the Federal Register, and Finra will issue a Regulatory Notice establishing an effective date.
The last time Finra submitted an expungement-related rule to the SEC for approval – a rule proposed in 2014 to ban the conditioning of settlement agreements on a customer’s agreement to not oppose an expungement request – the entire process took just over 3 months from Finra’s initial submission to the SEC until the rule became effective.
The news release leaves a number of questions unanswered. Finra has not yet provided the text of proposed rule(s), and the News Release makes no mention of the many other changes that were part of Finra’s original proposal. While the Board references creating a roster of arbitrators “among other things,” it provides no insight into what those “other things” might be. It also does not identify the “certain instances” in which the expungement roster will be utilized.